This video shows how narrow your focus can be. You'll have some fun, and what is revealed at the end is surprising. So pay attention as you watch the video. See what you notice.
It was done by pychologist, magician, and author Prof Richard Wiseman. Click here for background information about this video and the psychology behind it.
In part 1 of this post, we examined Change Blindness and how we can miss incredibly obvious things (right in front of us) if our attention is focused elsewhere.
In an information-rich environment, attention is a scarce and essential resource.
Think how often your focus blinds you to the obvious.
Here are two books written by Professor Wiseman. The first is called Quirkology, and it is about discoving big truths in small things. The second is called 59 Seconds, and it is about little things that make big differences.
Next week will tell us a lot about where this market is headed. Three big events will give us a sense of how the market reacts to news from its perch near recent highs.
It starts Tuesday, when we get election results. Many believe the market has been waiting for republicans to gain seats. If that takes place, and appears that it will, the market, you would think, will like it. However, some wonder if the news is already priced in to the markets. Here is a chart from Intrade showing how likely people believe it is that republicans gain seats.
On Wednesday, the fed will disclose more about QE2. The market wants to know where Fed Chair Bernanke stands on the critical issue of flooding liquidity. Again, even if the market gets what it wants, will it matter ... or has the rally already priced-in the effects of QE2?
Finally, Friday is when we see what's going on in the world of job creation (or lack thereof). This report is potentially more important than the first two, and I'm interested in how the markets respond more than I care about the details of the report.
The Rally Continues.
The Dow Jones Industrial Average is sitting in a decision zone with overhead resistance from the April recovery highs. This is notable because we are overbought, with negative divergences ... yet almost no selling pressure.
A sustained move above the resistance zone, shown in pink, would be a bullish sign.
Down Volume Is Rising ... And That Means So Is Risk.
Have you looked at what the New York Stock Exchange's "Down Volume" (DVOL) is showing lately? Marty Chenard, from StockTiming.com did and here is what he found.
Normal behavior in a rally is for the Down Volume to be trending lower.
That means, that as the market goes higher, less selling is occurring. However, rallies always reach a point where profits start to be captured. Since investors cannot take profits without selling, the Down Volume increases as profit taking activity increases.
Such a Down Volume-to-Market relationship pattern can be seen on today's chart.
Notice the rising red lines on the DVOL part of the chart. Those lines show that the Down Volume was increasing as the NYA Index continued to rise. That represented a negative divergence, and sign that investors were taking profits and selling into the rally.
If you look at the first three instances this year, the market soon pulled back after each round of profit taking.
What about the fourth instance?
That is one of those "you are here now" events. Since early September, our DVOL model shows that it has made a higher/low and a higher/high. That is important because that is the definition of an "up trend".
A historical word of caution ... if the Down Volume on the New York Stock Exchange index is rising, then risk levels are also rising.
Sentiment Is Approaching Extreme Levels.
The AAII Sentiment Survey shows a jump to a 2-to-1 ratio of Bulls-to-Bears. Readings above 2 tend to be bearish. We saw a reading like this about a month and a half ago and the market rally continued. Nonetheless, if you go back to the 2007-2008 bear market, it was a good early indicator of when to be a seller. Of course, some believe this is a bull market, so the indicator may behave differently. The circled area shows this ratio went much higher during more bullish times in 2005 and early 2006. Still, this bears watching.
Even if you are not a baseball fan, here's a statistic that jumps out and demands attention.
When the Texas Rangers competed against the New York Yankees, it marked the greatest disparity in raw dollars between payrolls in the history of playoff baseball, at $152 million.
In addition, there are some fun facts for you to impress your friends. For example, the Rangers could triple every current player's salary, sign Mark Teixeira away from the Yankees, and still have a lower payroll.
According to Bloomberg,the Federal Reserve and Japanese investors are poised to pass China and become America’s largest creditors following efforts from U.S. policy makers and the Bank of Japan to stimulate growth.
This chart shows the U.S. central bank’s Treasury holdings have risen to a record $821.2 billion, approaching China’s $846.7 billion. The figure for Japan is $821 billion, the most ever. China overtook both the Fed and Japan in 2008 as the communist nation bought dollars to hold down the yuan as a way to aid exporters, funneling the greenbacks into U.S. debt.
Does it seem strange to you that we are about to be our own biggest creditor?
Perhaps, as a sovereign nation, it makes sense if you plan on printing money to pay it back.
"If your job is to identify opportunities and risks in the market, you have to recognize that when the Fed is pouring fuel on the fire, when they send their minions out to discuss the Greenspan put, some people rush for the fire hoses ... but my job is to go grab some marshmallows and sticks and head over to the Boy Scout jamboree campfire. If your job is a policy analyst, well that’s a different situation. But if you’re an asset manager, you can’t fight the tape constantly. You have to recognize when massive Federal Reserve liquidity is going to goose the market. But I’m not going to argue with people who say this ends badly. Hey, every bull market eventually ends badly. You know, I can’t tell you if it’s a 25% correction or down 1,000 [points]. But you know what? You’ll have plenty of time to make that decision. Right now, as long as they are giving us an opportunity to make some hay, you have to participate while the sun is shining."
Dow Stalls With High Volume Near April High.
With a surge from 10,000 to 11,200, the Dow Jones Industrial Average is trading near its April highs and close to a 52-week high. However, it has started to stall with high volume. The chart shows the Dow battling the 11100 area with above average volume the last seven days. Arthur Hill notes that the trend since late August is still up. Nonetheless, a high volume stall could give way to a short-term reversal that starts a correction. High volume is often present at or near inflection points.
The yellow areas on the chart show volume surges that occurred at turning points.
For now, the Dow has yet to show any signs of weakness on the price chart. The Average established support at 10,900 with two lows over the last few weeks. This support level looks similar to the April support level. Notice how the April support break provided a clear signal. The bulls are in good shape as long as current support holds. A move below 10900 would argue for a correction that would be expected to retrace a portion of the prior advance.
Are there any other clues we can watch?
How Does the Dollar Affect the Dow?
Looking at the charts below, it is easy to see that there is a strong inverse correlation between the U.S. Dollar and the Dow. According to TSP Talk, this is not always the case ... but when it is, it does assist us to predict direction changes.
The upcoming quantitative easing (QE2) by the Fed could be seen as a catalyst for the dollar's decline, as more money being pumped into the system means a weaker dollar. If QE2 is priced-in to the market already, then we could have a “buy the news” reaction in the dollar, which in turn would likely hurt the stock market. In the mean time, the trend is clear.
The Q3 2010 IntraLinks Deal Flow Indicator™ (DFI) was just released and reports a 38 percent increase in global M&A deal activity in Q3 2010 versus Q3 2009. In the last quarter, deal activity is up nine percent compared to Q2 2010, a 68 percent increase from the Q1 2009 low.
Results show six straight quarters of growth in M&A deal volume, with a 68 percent increase from Q1 2009
The overall positive trends are consistent with the following factors in the marketplace:
General improvement and stability in the market
Impending tax environment changes and stockpiles of committed capital have provided the return of private equity buyers and sellers
Reduced strategic buyer fear of “double dip” recession resulting in more exploration of opportunities to supplement slow organic growth prospects and enter new markets.
Daniel Simons' experiments on visual awareness have become famous. The primary conclusion drawn from his research is that we can miss incredibly obvious things, right in front of us, if our attention is focused elsewhere.
Test Your Awareness.
Watch this video and count how many passes the team in white makes.
This is worth doing so you experience it yourself.
Try to ignore the black team. Just focus on the white team, and see if you can accurately count how many times they pass the ball.
OK, click the video to do it now.
Did you get the right answer? Even though I knew what to expect, the result or effect was surprising.
By the way, there is a newer version of this video, here.
Think how often your focus blinds you to the obvious.
Change Blindness.
Missing an invisible gorilla or a moon-walking bear may seem strange. However, the next experiment may be more surprising.
This video demonstrates "change blindness". In an experiment, 75% of the participants didn't notice that the experimenter who bent under a counter was replaced by a different person.
If you liked that, here is a version done by Derrin Brown. It is quite clever and worth watching. It was even more surprising to me because it was done in public with "real people". How did people not notice a white male switching with a black guy (or an asian female) in the middle of a conversation?
Warning: Objects In Your Attention Span Are Fewer Than You Perceive.
Moment by moment, the brain selectively processes information it deems most relevant. Experiments, like these, show the limits of our capacity to encode, retain, and compare visual information from one glance to the next.
More importantly, this suggests that our awareness of our visual surroundings is far more sparse than most people intuitively believe. Consequently, our intuition can deceive us far more often than we perceive.
Clearly, in an information-rich environment, attention is a scarce and essential resource. So, pay attention (or automate the things you know need to be done right, every time).
Bernanke Outlines 'Case for Further Action' to Spur Economy Forward.
Fed ChairBen Bernanke has some ideas about pumping more money into the flagging recovery to get us out of a different kind of hole. In talks last week, he clearly presents the case for more action.
He predicts a weak recovery and continued high unemployment.
Bernanke talks about a mandate-consistent 2% inflation rate -- further emphasizing this idea that the Fed will aggressively target positive inflation.
Barry Ritholz posted a word cloud of the speech. It speaks for itself.
According to the WSJ, the Fed sent an even clearer message in its written remarks. How? Bernanke used italics only four times in the report. Do those four instances constitute a 'font of wisdom' message from the Fed chairman. Let's look at the message.
First, Mr. Bernanke said the Fed takes its cues from two primary objectives: the "longer-run sustainable rate of unemployment" and the "mandate-consistent inflation rate." He later made clear what the Fed thinks about both right now: Inflation is "too low" and unemployment "too high."
That makes further Quantitative Easing pretty much a given, to the relief of investors who have already priced it in with a 12% surge in the S&P 500 since late August.
However, some commentators (like David Rosenberg) are skeptical about how much of the gain is priced-in already. His message: Sell the news, Quantitative Easing will do more harm than good.
Market Commentary
Even though stocks are overextended after a seven week run, I have not yet seen compelling evidence of weakness that would signal the start of a correction or pullback.
Nonetheless, I'm watching a few things closely. For example, we are seeing some negative divergences in the banking and financial sectors. They have not enjoyed the same success as the rest of the market over the last several weeks, and this may be telling us something.
On the other hand, the Nasdaq 100 Index (comprised of the large capitalization tech stocks) is leading the move higher. The recent strength in this index not only made a new 52-week high last week, it also hit levels not seen since late 2007. Should the S&P 500 Index follow this leader, the short-term future looks good.
The Economist's Big Mac index seeks to make exchange-rate theory more digestible. They say it is arguably the world's most accurate financial indicator to be based on a fast-food item.
The Big Mac index is based on the theory of purchasing-power parity (PPP), according to which exchange rates should adjust to equalize the price of a basket of goods and services around the world. For them, the basket is a burger ... a McDonald’s Big Mac.
According to this measure, the most undervalued currency is the Chinese yuan, at 40% below its PPP rate. In China, a McDonald’s Big Mac costs just 14.5 yuan on average, the equivalent of $2.18 at market exchange rates. In America, the same burger averages $3.71.
The tensions caused by currency misalignments prompted Brazil’s finance minister to complain last month that his country was a potential casualty of a “currency war”. The Swiss, who avoid most wars, are in the thick of this one. Their franc is the most expensive currency on our list.
The table below shows by how much, in Big Mac PPP terms, selected currencies were over- or undervalued.
The index is supposed to give a guide to the direction in which currencies should, in theory, head in the long run. It is only a rough guide, because its price reflects non-tradable elements such as rent and labor. For that reason, it is probably least rough when comparing countries at roughly the same stage of development.
Which Currencies Are Beating-Up On the Dollar?
You know the dollar has been in freefall since the middle of the summer. BusinessInsider posted a chart, from Morgan Stanley, showing which currencies have appreciated the most since then.
The big winner? The Swedish Krona. Note that the much-hyped yen is just in the middle of the pack.
Short, blue and furry could be the next tall, dark and handsome.
Once again proving it's not just a show for kids, Sesame Street spoofs the wildly popular Old Spice ad.
Grover preaches the importance of smelling like a monster and of using the word "on" correctly in the parody of the "Man Your Man Could Smell Like" ad featuring Isaiah Mustafa.
Have a look at the spoof, and the commercial that inspired it.
Capitalogix Commentary 11/01/10 - The Psychology of an Angry Electorate
Next week will tell us a lot about where this market is headed. Three big events will give us a sense of how the market reacts to news from its perch near recent highs.
It starts Tuesday, when we get election results. Many believe the market has been waiting for republicans to gain seats. If that takes place, and appears that it will, the market, you would think, will like it. However, some wonder if the news is already priced in to the markets. Here is a chart from Intrade showing how likely people believe it is that republicans gain seats.
On Wednesday, the fed will disclose more about QE2. The market wants to know where Fed Chair Bernanke stands on the critical issue of flooding liquidity. Again, even if the market gets what it wants, will it matter ... or has the rally already priced-in the effects of QE2?
Finally, Friday is when we see what's going on in the world of job creation (or lack thereof). This report is potentially more important than the first two, and I'm interested in how the markets respond more than I care about the details of the report.
The Rally Continues.
The Dow Jones Industrial Average is sitting in a decision zone with overhead resistance from the April recovery highs. This is notable because we are overbought, with negative divergences ... yet almost no selling pressure.
A sustained move above the resistance zone, shown in pink, would be a bullish sign.
Down Volume Is Rising ... And That Means So Is Risk.
Have you looked at what the New York Stock Exchange's "Down Volume" (DVOL) is showing lately? Marty Chenard, from StockTiming.com did and here is what he found.
Normal behavior in a rally is for the Down Volume to be trending lower.
That means, that as the market goes higher, less selling is occurring. However, rallies always reach a point where profits start to be captured. Since investors cannot take profits without selling, the Down Volume increases as profit taking activity increases.
Such a Down Volume-to-Market relationship pattern can be seen on today's chart.
Notice the rising red lines on the DVOL part of the chart. Those lines show that the Down Volume was increasing as the NYA Index continued to rise. That represented a negative divergence, and sign that investors were taking profits and selling into the rally.
If you look at the first three instances this year, the market soon pulled back after each round of profit taking.
What about the fourth instance?
That is one of those "you are here now" events. Since early September, our DVOL model shows that it has made a higher/low and a higher/high. That is important because that is the definition of an "up trend".
A historical word of caution ... if the Down Volume on the New York Stock Exchange index is rising, then risk levels are also rising.
Sentiment Is Approaching Extreme Levels.
The AAII Sentiment Survey shows a jump to a 2-to-1 ratio of Bulls-to-Bears. Readings above 2 tend to be bearish. We saw a reading like this about a month and a half ago and the market rally continued. Nonetheless, if you go back to the 2007-2008 bear market, it was a good early indicator of when to be a seller. Of course, some believe this is a bull market, so the indicator may behave differently. The circled area shows this ratio went much higher during more bullish times in 2005 and early 2006. Still, this bears watching.
Business Posts Moving the Markets that I Found Interesting This Week:
Lighter Ideas and Fun Links that I Found Interesting This Week
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